The US Dollar continued to rise last week. Renewed expectations that tax legislation will actually happen, and speculation over a new Federal Reserve chair to replace Janet Yellen brought about increases in interest rates across the US curve.

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t would be tempting to attribute some of this to European political risks in Catalonia and elsewhere, but in truth the Euro was actually the second best performing G10 currency and it is hard to detect any impact in FX markets as yet. The big losers last week were the New Zealand Dollar, which sold-off sharply on news of a Labour-led coalition government, and the South African Rand, under pressure on news of yet another cabinet reshuffle by President Zuma.

Major currencies in detail

GBP

Inflation and labour market data out in the UK last week effectively sealed the case for a Bank of England interest rate hike at its meeting next week.

Headline inflation in September came in at 3% annualised, the highest since early 2012. Core inflation rose nearly as much, increasing to 2.7%. While wages are lagging behind inflation, the job market is still healthy and at or near full employment. Markets are pricing in an 80% chance of a hike at the November meeting, which we see as reasonable. In this context, and given historically low levels for the Pound, any improvement in the news from the Brexit negotiations could ignite a sharp rally against the Euro.

EUR

Economic news was sparse in the Eurozone last week. The constitutional crisis in Spain over Catalonia, while gripping, has so far not had a clear effect in currency markets, which seem to be more focused on this week’s ECB meeting.

The Governing Council is expected to describe the pace and timing of an extension to its quantitative easing program. It is quite difficult to get a read on the markets expectations, given that the tapering function cannot be easily summarised in terms of soundbites. Equally important will be the ECB’s read on the failure of core inflation in the Eurozone to rise towards target in spite of strong economic growth. Elsewhere, the PMI activity indices will be closely scrutinised for any sign that the constitutional crisis in Spain is affecting business sentiment there.

USD

The US Senate took a key step to allow Republican tax cuts without the need for any Democratic support, so long as the Republican senators stay in line.

A significant fiscal stimulus in the US would hit an economy that is already at full employment, and it is likely that the Federal Reserve would react by hiking rates more than the market is expecting in 2018. There are also market jitters over Trump’s decision for the next Fed chair. We think that these are overdone, since no plausible nominee would be able to have all that much impact on policy given institutional inertia at the Fed.

The only news of note out of the US this week is the first release of third-quarter GDP growth. It will not be terribly meaningful given the drag from the hurricanes that hit the US in September. Therefore, we expect the US Dollar to react mostly to news elsewhere, namely the ECB’s meeting on Thursday.